The insurance industry's unbroken streak of COVID appellate victories hit a Vermont-sized pothole last week when the state Supreme Court ruled that an insured had pleaded sufficient facts to satisfy Vermont's minimal standard for avoiding a motion for judgment on the pleadings. In Huntington Ingalls Industries, Inc. v. Ace American Ins. Co., 2022 VT 45 (Vt. Sept. 23, 2022), a divided court ruled 3-2 that allegations that “fomite” had adhered to building surfaces was enough to refute any suggestion that coverage was “beyond doubt.” The majority agreed that “direct physical loss” requires that there be a “distinct, demonstrated physical alteration” to property but declared that this alteration did not have to be visible to the naked eye and could result from microscopic changes. Further, the court ruled that direct physical loss requires “destruction or deprivation of property” but that “deprivation” may occur when property is unusable due to a health hazard. Relying on the New York federal district court's decision in Kim-Chee, the court emphasized the difference between “persistent” events and contamination that is “ephemeral or transient.” Applying this standard to the shipyard's pleaded claims, the court found that the defendant insurers had not met Vermont's “extremely liberal” standard that it was “beyond doubt that there exists no facts or circumstances that would entitle the claimant to relief.” In particular, citing the recent California and Louisiana appellate rulings in Marina Pacific Hotel and Cajun Conti, the majority accepted the insured's contention that COVID virus particles were not only present at its shipyard but had adhered to property surfaces forming “fomite” that had “altered and impaired the functioning of the tangible, material surfaces” of the property. Justices Carroll and Bent dissented, arguing that the alleged presence of "fomite,” even if true, did not physical alter or change the property. The dissent emphasized that COVID affects humans, not property and that Ingalls had not alleged in its suit that it had to repair its property due to the presence of COVID particles, as required for “direct physical loss.”

The California Court of Appeal has ruled that a trial court erred in refusing to allow a consulting firm to amend its complaint to plead a claim for business interruption coverage for COVID losses. In Tarrar Enterprises v. Associated Ind. Corp., A162975 (Cal. App. Sept. 22, 2022), the First District observed that “denial of leave to amend constitutes an abuse of discretion unless the complaint ‘shows on its face that it is incapable of amendment,” which was not the case here.

A Kentucky-based chain of home cooking restaurants has petitioned the Sixth Circuit to grant en banc rehearing of a 2-1 panel's ruling in Wild Eggs Holdings, Inc. v. State Auto & Property Cas. Co., No. 22-5962 (6th Cir. Sept. 9, 2022). In its filing, Wild Eggs argues that the entire Sixth Circuit should hear its case because the panel opinion “conflicts with controlling Sixth Circuit and Kentucky precedent and injects needless confusion into how courts should interpret Kentucky law.”


SECOND CIRCUIT           First Amendment/Insurance Regulation (NY)

The U.S. Court of Appeals for the Second Circuit has overturned a lower court's ruling that inquiries by New York insurance regulators concerning efforts by the NRA to obtain insurance coverage for gun owners who might face civil suits impaired its free speech rights under the First Amendment. In National Rifle Assoc. of America v. Vullo, No. 21-636 (2d Cir. Sept. 22, 2022), the court declared that the New York District Court had erred in failing to dismiss the NRA's claim that Superintendent of the New York State Department of Financial Services had violated its rights to free speech and equal protection when she investigated three insurance companies that had partnered with it to provide coverage for losses resulting from gun use and encouraged banks and insurance companies to consider discontinuing their relationships with gun promotion organizations.

LOUISIANA           Mold/Resulting Loss

Despite the fact that United National's property policy contained three separate exclusions purporting to eliminate coverage for first party mold losses, a federal district court has declined to grant it summary judgment for losses resulting from a burst boiler pipe in the insured's Wyndham Hotel, ruling in CRU Shreveport v. United National Ins. Co., No. 20-151 (W.D. La. Sept. 23, 2022) that the mold had been caused by a covered peril and was therefore not excluded. In particular, the court observed that the exclusion's reference to loss “caused solely by mold” denoted a distinction between mold as a loss and mold as a cause of the loss.

NEW YORK           War Risk Exclusions

A federal district court judge in Manhattan that ruled that “war risk” and "financial services" exclusion in a liability policy precluded any obligation to defend a wrongful death that the parents of a passenger on Malaysia Airlines Flight 17 had brought against Western Union and other financial institutions in which they had contended that the defendants' financial assistance to the Russian-controlled Donetsk People's Republic was a factor in the DPR's downing of the aircraft in 2014. Applying Colorado law, Judge Furman granted Hartford' Fires motion for judgment on the pleadings, declaring in Hartford Fire Ins. Co. v. The Western Union Co., No. 22-557 (S.D.N.Y. Sept. 22, 2022) that the claims were excluded as seeking recovery for bodily injury “caused, arising, directly or indirectly, out of….War, including undeclared civil war” or “war-like action by a military force” or “insurrection, rebellion…” Judge Furman held that he need not decide whether the DPR missile attack arose out a “war” or “war-like action” inasmuch as the DPR's effort to secede from Ukraine was clearly an “insurrection.” The court declared that insurrection, rebellion, revolution and civil war are progressive stages of civil unrest of which insurrection is the most rudimentary. In any event, the court ruled that coverage was separately proceeded by a policy exclusion for injuries “resulting from the rendering of or failure to render financial services by any insured to another.”

SOUTH CAROLINA           Auto/”Use”/Shootings

The South Carolina Supreme Court has ruled that uninsured or underinsured benefits may not be recovered when an individual is shot and killed by another motorist while both cars were stopped at a traffic light. In Progressive Direct Ins. Co. v. Groves, No. 2020-1337 (S.C. Sept. 21, 2022), the court declared that the vehicle in this case was not an "active accessory" to the insured's injuries, nor more broadly, were these gunshot injuries "foreseeably identifiable with the normal use of [an] automobile." In an opinion that traces the development of South Carolina jurisprudence concerning the meaning of the "use" of an auto, the court declared that contracting parties intended these policies to apply to gunshot injuries and, as consequentially, "driving a vehicle and discharging a firearm at persons in another vehicle are acts of independent significance."


Inside the Insurance Industry

Marsh McLennan announced this week that Daniel Glaser is stepping down as its Chief Executive Office effective January 1, 2023 and will be succeeded John Q. Doyle.

Lloyd's of London has set aside $1.26 billion for claims relating to the war in Ukraine. Lloyd's also reported that it suffered a pre-tax loss of about $2 billion for the first half of 2022..

Environmental Update

3M has agreed to pay $54 million to resolve class action claims by Michigan property owners whose land and groundwater are contaminated by so-called “forever chemicals.”

Under Water

Insurance Journal reports that businesses in Jackson, Mississippi have been submitting claims for lost business during the recent water shortage in the state capital but that insurers are denying coverage for these claims for lack of “direct physical loss.”

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